How to Run an ICO
Despite the reputation ICOs have garnered, running one is a delicate and complex process and should be treated so. In this segment of the Academy we will detail general requirements and best practises to follow, as well as some tips based on the experiences of the Co-Founder and President of the Lisk Foundation, Max Kordek.
Should I run an ICO?
As running an ICO does not necessarily require a product or beta version, but can raise a substantial amount of money, ICOs have garnered a reputation for being an easy way to raise capital. However, in reality this is not the case. Running a legitimate ICO is a complex undertaking, which is continuously getting more difficult. There are more ICOs sprouting everyday, making the landscape ever more competitive, and the regulatory environment is a particularly turbulent one, meaning it can change at any moment and dramatically shift the landscape.
The first, and arguably most important, decision that must be taken into consideration before starting an ICO is whether it is actually needed. An ICO is a very particular way of raising money, with its own distinct pros and cons. It is surprising how few ICOs consider whether the concept that they are planning to launch actually has any tangible use for blockchain technology and tokenization, or genuinely provides value to potential users and investors.
An ICO is not only a means of raising money but also an innovative way of deploying blockchain technology and should be treated as such. It is not a fundraising tool for any business, it takes a niche product that can suitably apply blockchain technology and create an ecosystem wherein a token has genuine value for the user.
In its most basic explanation, Blockchain technology is distributed ledger that offers the option to record any form of structured information. However, blockchain comes with its own distinctions and downsides. For example, data is directly linked to a private key and if that key is lost so is anything associated with it. Such a model of data storage is not suited to every concept. For example, losing all your healthcare records due to a loss of a private key could be catastrophic. Naturally, this can be overcome by storing private keys on a database somewhere, but this then goes against the decentralized nature of blockchain.
Therefore, the first and foremost thing to consider is whether a problem actually requires blockchain technology to be solved. Does creating a utility token or cryptocurrency around the concept contribute to solving the issue? Could it be done better through a traditional centralized process? If the answer to the last question is yes, it is advisable to reconsider an ICO concept, both for the good of the project and blockchain technology as a whole.
Some projects will set out to just raise money, without thoroughly considering whether they are suited to utilising blockchain technology. It is unfortunate and is never advised. Such projects that raise investment with little scope for usage or success hold back the positive spread and adoption of blockchain technology.
Writing an ICO whitepaper
Once you have arrived at a concept, the next step is to write a whitepaper that is going to present the problem that you are solving, describe the solution and convince investors of the value of the project. Make an accurate costing model and have a clear fundraising goal, both in terms of a soft and hard cap, as well as a deadline.
Carry out extensive research around the Howey Test. Derived from the 1946 Supreme Court Case, the Howey Test dictates what is and isn’t a security. Having a clear understanding of the Howey Test can help to prevent an ICO falling foul of the SEC (US Securities and Exchange Commision).
Whitepapers can vary in length. The original blockchain whitepaper, released in 2008 by Bitcoin founder Satoshi Nakamoto, was only 8 pages long. The landscape has shifted considerably since then and now many whitepapers are well over 100 pages.
Even if the concept speaks for itself, the whitepaper needs to be thorough, covering every aspect of a project. If investors are seriously going to consider putting money into an ICO they need to be safe in the knowledge that the project is well thought through and that nothing has been left to chance.
There are a few things that every whitepaper does need to contain. They are as follows:
- The problem.
- A proposed solution (using blockchain technology).
- How the concept behind the ICO will implement the solution.
- How the token is going to be valued, distributed and interact within the ecosystem.
- The concept roadmap.
- The team behind the concept.
Each whitepaper is different and its form depends on the nature of the concept and project. Some are more technical, full of formulas and schemas, whereas others depict a concept better through illustrations and diagrams. Complex mathematics and cryptography will be involved in every blockchain project as it is important to explain the concepts in more digestible ways based on the inclinations and preferences of investors that the ICO is targeted at. Naturally, a clear understanding of these concepts is an absolute requirement too. It is advised to read through as many whitepapers as possible prior to writing one, in order to best understand how to communicate and what to include.
There is nothing preventing an ICO from having more than one whitepaper. For example, a technical and a non-technical version.
“I always want to see two whitepapers. One technical whitepaper and one based around the business itself and how it is going to be marketed.” – Max Kordek, President of the Lisk Foundation
Outside of the issue being solved, it is the team that is arguably the most important factor to consider. It tends to be the first thing that investors look at when deciding whether they should invest. A good concept with an underwhelming team will never materialise. Therefore, it is important to build a solid, multi-disciplined team consisting of professionals with proven track records of delivering on large projects, preferably with blockchain experience as well.
Building an ICO team
Building a worthwhile team to partake in the project will be one of the more demanding aspects of any ICO, . This can involve a heavy initial outlay on the part of the founders as no money would have been raised by this point.
It can be somewhat of a balancing act determining where most emphasis is needed over the course of a project in terms of developing a team. During the ICO stage marketing is most important in order to build awareness about the project and garner the interest of investors. However, many investors will be worried about a project that does not have a considerable roster of developers to bring the concept to life. Once again, it is about understanding what each individual ICO prefers and what type of investor the project aims to attract.
No investor will look favourably at a project that plans to hire its team once the fund-raising is complete.
Outside of the team working on the project, many ICOs will also flaunt the advisors that they have on their board. This is also a key aspect of demonstrating the value of a project. If respected industry individuals are willing to stand behind a project, it makes investors considerably more confident and safe about the value the project can bring. It is advised to research heavily who the foremost influencers are in the blockchain space and whether they are suited to a particular project. Advisors will normally expect compensation in the form of payment, as well as a portion of the tokens that will be distributed during the ICO.
“Do it yourself. Don’t rely on agencies. Build an amazing team in one location that lives the blockchain spirit. Don’t try to be “cool” by having a remote team scattered around the world.” – Max Kordek, President of the Lisk Foundation
Building an efficient and effective team is undeniably one of the most defining aspects of any ICO, and a hugely deciding factor in whether the project will be successful or not. This in turn makes getting influential advisors on board easier too. It is near impossible to pinpoint an exact balance between the developers and marketers that should be on your team as it hugely varies from project to project. Although too much emphasis on one over the other is never advised. However, what can be guaranteed is that if the ICO is a worthwhile concept it will be considerably easier to get talent on board.
There are many ways of developing an ICO depending on which platform is chosen to do so. Research is advised about which is most suited to the individual ICO. With the release of the Lisk Sidechain Development Kit, anyone will be able to launch ICO’s through the Lisk platform, distributing tokens on their own sidechain, all with the security of the Lisk mainchain.
Other best practises
- Set up a foundation in a cryptocurrency friendly location. For example, the Lisk Foundation is based in Zug, Switzerland.
- Set up social channels so investors can reach out to you. Telegram, Reddit and Twitter are among the most popular channels used in the space.
- Always communicate consistently and professionally. Investors, especially in the cryptocurrency space, are very active with their communication. It is very important to respond in kind.
- Do not hype the price of your token. Let the product speak for itself.
- Always prioritise investor security.
“Interact heavily with your community so they become a big part of the project itself.” – Max Kordek, President of the Lisk Foundation